Grand Old Parity

By Sheila C. Bair

Feb. 26, 2013

WASHINGTON

LAST month Emmanuel Saez, a celebrated economist at the University of California, Berkeley, issued another depressing report on income inequality. Among other things, Mr. Saez examined how real family incomes changed in the United States from 2009 to 2011, the first two years of the recovery. The richest 1 percent of Americans, he found, saw their incomes grow, on average, by more than 11 percent. As for the other 99 percent? You guessed it: incomes shrank by nearly half a percent.

The phenomenon is hardly new. The yawning gap between rich and poor has been growing since the 1970s and reached a 90-year peak in 2007, just before the financial crisis. The Great Recession narrowed the gap a bit, but now, once again, the richest Americans are vacuuming up what wealth is out there, a trend that Mr. Saez expects to continue.

I am a capitalist and a lifelong Republican. I believe that, in a meritocracy, some level of income inequality is both inevitable and desirable, as encouragement to those who contribute most to our economic prosperity. But I fear that government actions, not merit, have fueled these extremes in income distribution through taxpayer bailouts, central-bank-engineered financial asset bubbles and unjustified tax breaks that favor the rich.

This is not a situation that any freethinking Republican should accept. Skewing income toward the upper, upper class hurts our economy because the rich tend to sit on their money — unlike lower- and middle-income people, who spend a large share of their paychecks, and hence stimulate economic activity.

But more fundamentally, it cuts against everything our country and my party stand for. Government’s role should not be to rig the game in favor of “the haves” but to make sure “the have-nots” are given a fair shot.

President Obama, who has rightly made income inequality a signature issue, cannot be pleased that the über-rich have gained under the policies pursued by his administration, while the bottom 99 percent have not. Unfortunately, his economic team, populated by acolytes of the former Treasury secretary Robert E. Rubin, has relied on the same “growth” policies that got us into trouble precrisis: generous treatment of the financial sector and easy money from the Federal Reserve. These strategies have done little to encourage sustainable economic growth, but they have worked wonders to increase Wall Street profits and inflate the value of stocks and bonds — which are disproportionately owned by the rich.

Why haven’t Republicans made an issue out of this? No doubt some fear that discussing it openly would catalyze support for redistributionist policies, which are anathema to a party that prides itself on increasing the pie, not redividing it. But there are other policy options to demonstrate Republicans’ commitment to the average Joe and Jane that are very much in the party’s tradition.

For instance, as part of renewed fiscal discussions over sequestration, Republicans should put fundamental tax reform on the table and make it our priority to end preferential treatment of investment income, which lets managers of hedge funds pay half the tax rate of managers of shoe stores.

Defenders of this giveaway make the unsubstantiated claim that it encourages job-creating investments. But what we have now is merely an immense pool of investment funds that has created far too few jobs. A report last year by Bain and Co. projected that by 2020 there will be $900 trillion in financial assets around the globe, chasing investments in a real economy worth only $90 trillion in gross domestic product. Why in heaven’s name do we need to keep a tax preference to encourage more?

If we eliminate this and other unjustified tax breaks, we can produce enough new revenues to lower marginal rates and reduce the deficit, according to both the Simpson-Bowles and Domenici-Rivlin debt-reduction plans.

Republicans should also put rebuilding the nation’s transportation and energy infrastructure high on our political agenda. From Lincoln’s transcontinental railroad to Eisenhower’s highway system, Republicans have understood that investing in critical infrastructure projects creates jobs and expands commerce.

And given that the Federal Reserve insists on giving us cheap money, let’s use it for the benefit of the country by issuing long-term debt to finance such projects and repay it over decades through dedicated taxes and user fees.

Some may say I am tilting at the windmills of Tea Party orthodoxy in making these suggestions, but I believe that most Republican politicians would be sympathetic to them, if only they could overcome their fear of primary challenges and the loss of Wall Street money. Having worked for Senate Republicans in the 1980s, I remember a time when Republicans stood up to special interests and purged the tax code of preferences for investment income and other special breaks.

They managed to survive re-election by showing leadership, taking principled positions and defending them vigorously. It’s time for the Grand Old Party to return to those roots.